Testimony on House Bill 182–Limiting the Interest Rate on Payday Lending to 36 Percent
House Banking and Insurance Committee, Kentucky General Assembly
February 16, 2011
Melissa Fry Konty, Ph.D.
Research and Policy Associate, Kentucky Center for Economic Policy
Thank you for giving me the opportunity to speak with you. My name is Melissa Fry Konty. I am a Research and Policy Associate at the Kentucky Center for Economic Policy.
In 2008, Kentuckians paid upwards of 400 percent APR on an estimated three million payday loans, totaling approximately $158 million in predatory loan fees.1
When we say “predatory fees” we refer only to those fees paid by borrowers who take out five or more loans in a year: those borrowers who are stuck in the debt trap. The fees associated with these repeat loans are considered predatory, as they are collected as the result of a business model built on people’s inability to repay a loan with such a short term. Trapped borrowers incur a new set of fees every 14 days to borrow the same principal amount.
According to the Commonwealth’s new database, 83 percent of Kentucky’s payday loans from April 30 through September 30, 2010 went to consumers who took out five or more loans during that five month period. Just 2.5 percent of payday lending revenue was generated by customers who took out only one loan during that same five month period. In total, from January through September 2010, 182,159 people took out 1.6 million loans for an average 8.6 loans per borrower. These borrowers paid more than $80 million in fees.2
High payday lending fees drain resources from communities large and small across the Commonwealth. Sixty-four percent of payday lenders in Kentucky are nationally owned and their profits leave the state. Nine of the 10 largest payday lenders in Kentucky are out of state companies.
Some suggest that a rate cap will drive payday lenders out of business and lead to job loss in the state. But threats of job loss are highly exaggerated. Turnover in the payday loan industry is consistently high, upwards of 60 to 80 percent annually.3 In some cases, approximately 50 percent of turnover for storefront managers and employees occurred within the first six months of their hire date. Moreover, ending 400 percent APR does not end payday lending, it simply means that these companies can no longer charge exorbitant interest rates for these loans. As has happened in other states, they certainly have the choice to keep their doors open by offering payday loans at 36 percent and by marketing other products and services that comply with Kentucky’s common sense usury laws.
In a recent poll of Kentucky’s registered voters, 73 percent of citizens across the state said they want a 36 percent rate cap on payday loans. Even when we mention the possible loss of jobs in the payday industry, a clear majority of voters support the 36 percent rate cap.
The state’s database tracking information about the use of payday loans has not curbed the debt trap from predatory payday lending, but it has confirmed that one exists. Only a return to a 36 percent rate cap can stop predatory payday lending in Kentucky. We urge you to pass House Bill 182 out of committee and to the House floor.
- Kentucky Coalition for Responsible Lending. 2010. The Debt Trap in the Commonwealth: The Impact of Payday Lending on Kentucky Counties. http://kyresponsiblelending.wordpress.com. ↩
- These figures include historically loaded transactions for January through April 29. Payday lenders were not yet using the database so these figures were historically loaded and may be incomplete, but they are the most complete data we have for January 2010 to September 30, 2010. The mean number of transactions (i.e. number of transactions/number of borrowers) is 8.6 for this period. ↩
- See, e.g., Advance America 2008 10K at page 28, “As of December 31, 2008, the annual turnover among our center managers was approximately 38 percent and among our other center employees was approximately 94 percent. Approximately 47 percent of the turnover has traditionally occurred in the first six months following the hire date of our center managers and employees,” http://investors.advanceamerica.net/secfiling.cfm?filingID=1047469-09-2196, See also Advance American 2009 10K at 29 “As of December 31, 2009, the annual turnover among our center managers was approximately 29 percent and among our other center employees was approximately 67 percent,” http://files.shareholder.com/downloads/AEA/972414399x0x364298/70BB4044-A6B2-4F3B-8A22-042AF8DF6485/Advance_America_2009_Annual_09APR2010.pdf. ↩